Internal Controls: Why They are Not Just for Big Businesses Anymore

A company’s assets need safeguarding, regardless of what size the business is, and this involves monitoring the accuracy of financial statements while making sure that regulatory requirements have been complied with. Instead of focusing on Financial Reporting (ICFR), cost-effective internal controls provide small- to medium-sized businesses with a better overview of their financial records, minimizing their risks.

A Definition of Internal Controls

Because many SMBs haven’t been offered the benefits of internal controls before, many don’t understand what they are or how they can help them. In layman, internal controls help to lessen a company’s risks in their compliance, financial reporting and operations. There are a number of different internal controls available, including an AICPA Certified SOC Audit that focusses on the risks involved with outsourced services.

How Can Risks Be Prevented?

When it comes to controlling loss and theft of a company’s assets, many business owners may feel like they know what’s going on and that they’ve got their finger on the pulse. However, auditors often arrive to tell them that there are certain deficiencies, which leads to them questioning how they control their risks and what internal controls need putting in place. This then leads to concerns as to how much this is going to cost and what controls are available for their business size and industry.

However, waiting until an auditor points out these problems isn’t the answer, particularly when these risks can be resolved much earlier on. There are a number of ways that business owners can start to implement internal controls, and without it costing them a fortune.

Using common sense, many small businesses can execute their own internal controls, which will strengthen their accounting and business strategies as a whole. This all starts by evaluating what potential risks there are in the company and how this can be controlled. Trying to eliminate any errors that may occur with auditing procedures, inspections, reconciliations and double signatures, will all help to detect and prevent the risks of the company.

Here are some key ways SMBs can utilize internal controls in their business:

• Accurate Financial Numbers

In order to make decisions that are good for the business, accurate accounting records are imperative. Making sure all of the numbers add up will help managers to make decisions that are going to further drive the success of the company. Reports that include things like accurate statements and tax return figures are all key to this decision-making process.

• Reducing Fraud

According to the ACFE Report to the Nations on Occupational Fraud and Abuse, approximately 6% of businesses revenues are lost each year due to fraud. And small businesses aren’t exempt from these figures just because they have a small number of employees. No matter what size the fraud is, it’s still eating into the profits of a company.

In order to tackle fraud, companies need to reduce the window of opportunity for fraudsters and make employees aware that their activity is being monitored. Making more than one employee responsible for certain aspects of the business will help to reduce the window of opportunity. Many fraudulent activities within companies begin when an employee makes a mistake (genuinely) and then realizes it hasn’t been picked up. Realizing that they can get away with this as no-one is monitoring them, they continue to do it.

Without the necessary detective controls in place, these small mistakes have the potential to become large-scale fraudulent cases, with this person realizing how they can get away with activity and how they can embezzle money from the organization. With fraud, one of the best deterrents is creating a fear that the person carrying out the crime will be caught.

• Comply with Regulations

Internal control over a company’s assets needs to be maintained in accordance with the regulatory requirements that all publicly trading companies are subject to. These businesses will be assessed on how they manage and control risks and even small businesses may find that they are required to show how they control risks to potential owners or lenders.

• A Positive Reputation

Within any successful business, it’s crucial that a good reputation is retained, and this can soon become tainted when a company doesn’t meet their obligations, or they make errors when it comes to payments or billing. Equally, if a company falls victim to crime through fraud, this too can have a negative impact on their reputation, albeit unfair in the circumstances. Therefore, internal controls help to keep the business running accurately, reducing the chances of risks and failure that could have a detrimental impact on its reputation.

George Robson works as a risk manager. Knowledgeable in his work he enjoys writing on the topic for business blogs around the world wide web.